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What the US can learn from Sweden about how to launch a bitcoin fund

Many Americans are tired of hearing about how Scandinavian societies have figured out how to do everything better than us, but here’s one more: how to launch a bitcoin fund.

The Securities and Exchange Commission and ETF companies can’t agree on how to bring a bitcoin exchange-traded fund to market. Just last week four prospective bitcoin ETF issuers withdrew their filings for new funds tracking the digital currency after the SEC shot them down, citing concerns about trading liquidity and valuation of underlying bitcoin futures.

But a Swedish company has proved how it can be done. It has successfully run a bitcoin exchange-traded product for the last two years that can be accessed by European investors in multiple countries, and the products have attracted more than $1 billion.

Stockholm-based XBT Providers launched its CoinShares series in 2015. The XBT Bitcoin Tracker One (COINXBT) trades in Swedish krona, while the XBT Bitcoin Tracker Euro (COINXBE) — they launched on the Nasdaq Stockholm in 2015. XBT also issued versions in Denmark, Finland, Estonia and Latvia. In the Swedish krona version, 200 shares equal the price of one bitcoin, and in the euro version 20 shares equal the price of one bitcoin.

The big difference between the successful Swedish launch and the impasse in the United States is the type of exchange-traded product: the XBT portfolios are exchange-traded notes (ETN), not exchange-traded funds.

An ETN is an unsecured debt instrument that promises to pay the pattern of returns of the bitcoin price. Ironically, despite being an unsecure instrument, the XBT product tracks the spot price of bitcoin by holding the actual currency and forward contracts in case of a liquidity shortfall.

“At that point in time, the ETN structure was the best route to bring the products to market,” said Laurent Kssis, chief executive officer of XBT Provider. “As a result of using this structure to bring the product to market, investors have been able to gain exposure to the price movement of bitcoin since 2015. This stands opposed to the U.S., where most investors are still waiting for access to bitcoin exposure via their normal brokerage account.”

There are three ways to construct a bitcoin portfolio

There are three different ways in which a firm could create a bitcoin exchange-traded product. It could create an exchange-traded fund that owns and stores actual bitcoins, similar to the SPDR Gold Shares ETF (GLD). GLD tracks the spot price of gold by holding physical gold bricks in bank vaults in London. The second way is a bitcoin futures ETF, which approximates the price of bitcoin by owning bitcoin futures products. That’s been the dominant paradigm for SEC filings, including the ones recently pulled, due to the recent uptick in bitcoin futures contracts offered by major U.S. exchanges and securities firms.

“I think using the ETN structure to launch a bitcoin product was a good fit,” said Arlene Reyes, chief operating officer of Exchangetradedfunds.com, a website that reports on global ETFs. “ETNs are unsecured instruments backed by the credit of the issuer, and it tracks the performance of the underlying asset. … XBT Provider holds bitcoins equal to the value of ETN shares issued and tracks the performance of the price of bitcoin. I can see how this structure would be attractive to regulators.”

“I don’t know why an ETN hasn’t been done yet. We know other people are in discussions to make one, but it’s not us. We know it’s being talked about.” -Garrett Stevens, chief executive officer of Exchange Traded Concepts

This past October, XBT came out with two more ETPs to track the second most highly used cryptocurrency, ether, in both Swedish krona and euros: Ether Tracker One (COINETH) and Ether Tracker euro (COINETHE). These also are listed on the Nasdaq Stockholm for European investors.

One of the ETF companies that filed for a bitcoin ETF has looked at the ETN route and says others have been talking about it as well.

“We have considered notes with regards to bitcoin, but we have not had the opportunity,” said Garrett Stevens, the chief executive officer of Exchange Traded Concepts, which worked with REX ETF on a rejected bitcoin futures fund. “But we are a white-label company and we do what someone else wants. That’s what the REX guys wanted, so that’s what we created. I don’t know why an ETN hasn’t been done yet. We know other people are in discussions to make one, but it’s not us. We know it’s being talked about.”

There is one product that currently gives U.S. investors access to the bitcoin market — the Bitcoin Investment Trust (GBTC), managed by Grayscale Investments. However, GBTC is not an ETF, despite press reports. It’s not SEC-registered, and it trades on the Nasdaq over-the-counter markets. It’s highly volatile and can trade at an extreme premium to the price of bitcoin. Some brokers, including Merrill Lynch, are refusing to sell GBTC and other bitcoin-related securities to their clients.

Because they trade on an exchange, products like ETFs and ETNs are not only priced using a net asset value (NAV) — the value of securities held minus liabilities and divided by shares outstanding — that is calculated at the end of each day and by intraday NAV (iNAV) throughout the day. They also have a current market price, which can be more (a premium) or less (a discount) to actual value. The more volatile a market, the more likely there is to be a premium/discount issue.

“The [XBT] products are very well designed for what they do. They deliver, unlike GBTC,” said Matt Hougan, the chief executive of Inside ETFs, an ETF education company. “They give exposure to the returns of bitcoin and ether pretty well. I think they were well executed and they’ve done their job.”

But Michael Sonnenshein, managing director of Grayscale Investments, remains positive. “We are thrilled about the response of the market to the Bitcoin Investment Trust since it became publicly quoted in 2015,” he said. “My team is looking forward to bringing our second vehicle, the Ethereum Classic Investment Trust, to the OTCQX market in second quarter of 2018.”

Some ETF experts believe the chances remain good for a bitcoin ETF to be approved this year.

Before the crash, ETNs were more popular in the US

ETNs were once among regular exchange-traded product launches in the United States, though never at the level of exchange-traded funds in number of portfolios or assets raised. They were more popular with banks as issuers — which had the existing debt businesses to structure the credit side of the investment — than with standalone asset-management companies.

Before the financial crash, there were dozens of ETNs that covered commodities sectors, and many still exist today. But ETNs became less popular after the financial crash, based on the theoretical risk that a failure like Lehman Brothers could expose ETN investors to severe credit risk. While the theoretical risks did not play out, ETNs waned in popularity among new launches.

At the end of 2008, near the depths of the fiscal crisis, there were 74 ETNs, totaling $3.6 billion in assets under management. By the end of 2017, there were 204 ETNs, with combined assets of $24.9 billion, according to ETF.com

ETF companies that have filed for bitcoin ETFs, including REX, Proshares, Van Eck and Direxion declined to comment. Gemini, the investment company of the Winklevoss twins, did not respond to a request for comment.

Like the U.S.-based GBTC, the XBT bitcoin ETNs typically trade at a premium or discount to the actual price of bitcoin, but the range has been much smaller than in the case of GBTC, between 1 percent and 3 percent.

According to Bloomberg, the 52-week average percent premium is 0.46 percent, but it has been as high as 21 percent and as low as negative 16 percent. Still that’s a far cry from the 65 percent premium seen on GBTC.

“What Laurent has proven is the ETN structure has worked and been able to deliver that pattern of returns that’s different from the two paradigms filed with the SEC, which is the physical and the bitcoin futures products,” Hougan said. He also thinks the premium/discount issue is being handled fairly well in the case of XBT’s bitcoin portfolios.

“Bitcoin is an expensive product to trade, custody, store and service at this point. So I don’t think a 3 percent premium in the ETN is absurd,” he said. “That makes the ETN a viable approach.”

Currently, the two Bitcoin Trackers combined (krona and euro) have total assets of $900.8 million, and the two Ether Trackers have total assets of $439.3 million.

By Lawrence Carrel, special to CNBC.com

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A Buyer’s Market for IPOs

If the performance of Tesla Motors on its first day of trading is any indication, the market for initial public offerings, moribund for much of the past two years, may be reviving. Shares of Tesla (symbol TSLA), an unprofitable maker of electric cars, surged 41% on June 29. What makes the jump especially noteworthy is that it occurred on a day when the Dow Jones industrials cratered 268 points, or 2.6%.

Tesla made the biggest splash, but others have also come to market recently with successful IPOs. One is CBOE Holdings (CBOE), the holding company for the Chicago Board Options Exchange, a market for trading listed stock options. Another is AutoNavi Holdings (AMAP), a Chinese maker of digital navigation systems for autos. They posted first-day pops of 12% and 8%, respectively. (In what may be the largest IPO ever, Agricultural Bank of China went public on July 6 on exchanges in Hong Kong and Shanghai, but not in the U.S.)

And IPO investors are anxiously waiting for Facebook to sell shares in what would almost certainly be the hottest offering since Google (GOOG) went public in 2004. A recent venture-capital investment in the social-networking stalwart values Facebook at a cool $23 billion, although the company says that it’s in no rush to go public.

Experts say now is a great time to dip your toes into IPOs. Unable to get loans from tight-fisted banks, many startups have had to sell stock to find the cash necessary for survival and growth. That can mean good deals for investors. A company may have to sell a large portion of itself to raise a certain amount of money. Or if it wants to limit the percentage sold to the public, it may have to accept a low share price. “It’s a buyers’ market,” says David Menlow, president of IPOfinancial.com, a Millburn, N.J., research firm.

Why should individuals care about IPOs? Because they give investors a chance to get in on small, fast-growing companies at the bottom floor. Companies can raise cash in the capital markets in one of two ways: taking on debt or selling stock. An initial public offering is the moment when a private company goes public. To generate capital, insiders, such as company founders and private investors, sell part of their ownership stake to stock-market investors. A company can use cash raised in an IPO to grow the business, pay down debt, give employees and insiders an opportunity to cash in their shares, or form some combination of all three.

Two kinds of investors buy IPOs: speculators, known as flippers, who sell after garnering a big first-day pop in the share price, and those who want to hold for the long term. Flippers long for the days of the technology bubble, when Internet IPOs rocketed more than 100% on their debut. Long-term investors search for the next Microsoft (MSFT). The software giant leapt 32% in its first day — and those who held until now have seen a return of almost 32,000% (despite the stock being down 42% over the past ten years).

Looking at the IPO Calendar

Bloomberg reports that in the second quarter, 91 companies filed with the Securities and Exchange Commission to sell $23.6 billion of shares. Some are familiar names, such as General Motors, hospital chain HCA, retailer Toys “R” Us, consulting firm Booz Allen Hamilton and Nielsen Holdings, the television-audience rating company. Most of these are formerly public companies that were bought by private-equity firms or, as in the case of GM, that essentially became a private company after being rescued by the U.S. government.

However, the best reason to buy an IPO is to partake in the growth of a small, young company, and the coming months promise some compelling opportunities.

For the full story:

Source: .kiplinger.com

WisdomTree Now Offers Growth

Nice ticker symbol.

WisdomTree on Thursday launched the LargeCap Growth Fund (ROI) on the NYSE Arca. ROI is usually the symbol for “return on investment.” Nice score on WisdomTree’s part.

The new ETF is designed to track the WisdomTree LargeCap Growth Index. This fundamentally-weighted index measures the performance of approximately 300 domestic large-cap growth companies. Each company’s weighting is set annually and based on the earnings generated during the prior four fiscal quarters. The ETF has an expense ratio of 0.38%.

WisdomTree, the market leader in fundamentally-weighted indexes, is best known for its family of ETFs based on dividends-weighted indexes. This isn’t the firm’s first earnings-based ETF, it launched a few others earlier in the year. But it is a radical departure for WisdomTree. It’s the first growth-oriented fund in this value-oriented firm. Not only is this WisdomTree’s first fund focused on growth stocks, but it’s the first growth-oriented ETF among all the Fundamentalists, those fund families with indexes based on fundamental metrics.

One big disadvantage of dividend-based ETFs is that they ignore strong companies that refuse to pay out dividends, such as technology companies. Earnings-based indexes, and especially growth funds, have the potential to expand WisdomTree’s customer base by offering an ETF with some of the fastest growing companies in the world, such as Google.

Jeremy Siegel, famed professor of the Wharton Business School and a senior advisor to WisdomTree, said in a written statement, “I devoted the first chapter of my book, The Future for Investors, to what I call the ‘Growth Trap,’ the long-standing problem of investors paying too much for the future prospects of growth companies.”

One assumes the new ETF digs itself out of the “Growth Trap”, but WisdomTree didn’t elaborate. The company did say, “growth’s historic underperformance may have more to do with how the major growth indexes are constructed, than with growth stocks themselves.”